Kotak Securities keeps BUY on Sesa Goa

Kotak Securities keeps BUY on Sesa Goa

The government has announced scrapping of export duty on iron ore fines from present 8% and export duty on iron ore lumps is reduced to 5% from present 15%.

Export duty cut would substantially reduce the export duty burden on Sesa Goa and would be significant EPS accretive as more than 90% of iron ore exports are in form of iron ore fines.

In view of the current sharp downturn in the global economic activity which has led to sharp cut in steel production, we are further cutting down are estimates of the iron ore sales volume by 1.5MT each for FY09E and FY10E to 14MT and 19MT respectively. The estimates are now at significant discount to the management guidance.

We have also reduced the estimated contribution from contracted iron ore sales (where price realizations are substantially higher as compared to spot sales) for FY09E to 35% from earlier 45% to safeguard against any risk of early termination of annual contract agreements (though looks unlikely as of now).

We now estimate an EPS of Rs21.9 for FY09E and Rs25.5 for FY10E from earlier Rs25.1 and Rs25.5 earlier. We arrive at a revised target price of Rs123 (Rs.128 earlier) based on 2.5 EV/EBITDA for FY09E.

We have also done DCF valuation, which gives us fair value of Rs.169 based on 14% WACC and 0% terminal growth post FY15E. We recommend a BUY on Sesa Goa with a revised price target of Rs123.